Cost Concepts and Behaviors-EEP-lec5
Cost Concepts and Behaviors-EEP-lec5
Cost Concepts and Behaviors-EEP-lec5
03 July 2011
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related to manufacturing because its basic activities such as purchasing raw materials, producing finished products, marketing are commonly found in most of the other businesses.
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Manufacturing Costs
Manufacturing converts raw materials into finished
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Manufacturing Costs
Manufacturing Costs
Direct material costs are costs of materials used in the final product and they can be easily traced into it.
Direct Material Costs
Direct labor costs are costs of labor that go into the production of a product.
Direct Labor Costs
Manufacturing overheads
Manufacturing overhead costs are costs that are included except material and labor costs.
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Non-manufacturing Overheads
There are other costs that are included in the cost of the product but are not manufacturing costs.
Non-manufacturing overhead (administrative)
heat and light, salary of non-manufacturing staff, stationery, insurance, depreciation, etc. Marketing & selling costs advertising, shipping, sales commission, salary of salesmen etc.
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Income Statement Revenue Costs of Goods Sold (COGS) Gross Profit Expenses Net Income Balance Sheet
Product Costs
When goods are sold
Period Costs
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$0.65 0.05 0.61 0.25 0.25 0.23 0.08 0.23 0.09 0.08 0.05 0.13 $2.50
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Cost Behavior
An engineer needs to know what will happen if the production is increased by 5% and what will be the product cost? Cost behavior describes how a cost item will react or respond to changes in the level of business activity. Volume index the unit or measure used to define a volume is called volume index such as pieces produced or KWh electricity produced or used.
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Cost Behavior
Fixed costs these costs do not change within a given time frame under a relevant range. (example ; rent, insurance, administrative expenses, depreciation etc.) Variable costs costs vary as per the volume of production. (example: direct material costs, direct labor costs, direct manufacturing costs etc.) Mixed costs these costs contain both the fixed and variable costs such as depreciation and utilities.
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as volume increases, the fixed cost per unit decreases. The mixed cost per unit also changes as volume changes, but the amount of change is smaller than that for fixed costs.
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Amount
Variable costs
Volume
Volume
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Volume
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adding overtime or by adding Saturday operation or both. No increase in fixed costs is entailed, but the variable cost is $36 per unit for output in excess of 24,000 units per week upto 36,000 unit capacity. Option 2: Operate a second shift. The maximum capacity of the second shift is 21,000 units per week. The variable cost on the second shift is $31.50 per unit and operation of a second shift entails additional fixed costs of $13,500 per week.
Determine the range of operating volume that will make option 2 profitable.
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36 Q Cost $108,000
13,500 +31.5 Q
Q =3,000 units
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12,000 units
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$100,000 190,000 35,000 340,000 20,000 100,000 $445,000 $22.50 20,000 100,000 -35,000 $425,000 $21.50
Assignments
Chapter 2 Page 56
Chapter 3 Page 89
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